Price setting is complex, just as important as market awareness, product development and advertising. You could do all these things excellently and then undo it all on the price.

Pricing is one of four specific factors which determine your profit and it’s one that you have some control over. But the bigger picture is to keep your focus on profit, understand what drives it, and always be able to relate pricing to profit.

What is profit?

Profit is residual. The important thing to note is that profit is what’s left over after you’ve paid all your expenses. It is the consequence of what happens in and to your business. Some of these things are within your control and some of them are outside your control.

The foundation of an effective pricing strategy is the gross margin you need to achieve to be profitable. Work out the likely impact of upward or downward movement in your prices on gross margin. Factor in your competitors, their pricing and profile in the marketplace. And think about your customers, how well you service them, whether they’re price sensitive and whether you can offer them more or attract more like them to your business.